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That old age problem that won't go away

Why do the French and Scandinavians get a decent state pension and not the British? Richard Saville explores our reluctance to look after the old

Most of us expect to live into old age and how well we live is usually down to our pensions. Robin Blackburn, for many years editor of New Left Review , and one of a distinctive circle that has broadened British intellectual life since the 1960s, offers us chapter and verse on the erratic and volatile side of the industry. This book may well succeed in generating real anger about the way the aged are treated and much else that is wrong in the world of finance. The core concerns the rise of the worldwide private and occupational pensions industry, which now disports $13 trillion in assets (1999), three-fifths of which are held in the US and 11 per cent in UK funds. When the funds move, their power is vast. The book covers numerous approaches to pensions across the globe, including the implications of pension-fund management for investment, Anglo-Saxon versus European economics, and many of the mysteries of the wider finance industry. One merit of the lengthy essay on the history of pensions is to remind readers of the evolution of the excellent qualities of the state pension schemes in western Europe and Scandinavia.

This volume helps to explain both the general complexity of the pensions problem and why our pensions are inferior to most schemes in western Europe. A matter of intellectual and political history of course: we need to go back to the ways our forebears faced the challenges of industrialisation; the workings of the trade cycle and of seasonal factors that led to pay cuts, conflict at work and lay-offs. To these were added industrial injuries, a greater degree of inter-personal violence than we accept in today's workplace, and the timeless problems of illness, family responsibilities, war and civil unrest. When some repose might be thought in order after a lifetime of hardship, people faced the ravages of old age with little in the way of savings. For those in towns, which in England meant the majority after 1851, the extras that came with village living were all too rare; in particular, the loss of free fuel and an allotment or garden were keenly felt. Some might enjoy a pittance from charity and church, and artisans might have a savings bank account, but social reformers painstakingly established that across industrial Europe a third and more of the aged were destitute, paupers, malnourished and often sick.

There remained throughout the 19th century huge gaps in social provision. In The Life and Labour of the People of London , (1886), Charles Booth estimated 39 per cent of the over-65s were paupers, "not because of any personal failing, but because of inability to work". The existence of misery among abandoned women, widows, the industrially injured, and the sub-categories of the working classes could hardly be ignored. How were they supposed to raise savings? A stream of investigations laid out for legislators the consequences of industrialisation, and it was left to Bismarck to settle the first old-age pension scheme in 1889, supported by the Socialist parties and the Catholic church. Britain finally caught up in 1908.

Why so late? Why did it take over a century of grime and soot for the premier industrial nation to establish that the system of charity and chapel was incapable of offering a decent old age? Obvious impediments were the strength of Conservative and Whig ideas, the confidence of the upper classes in a political system that secured their purposes so well, and the failure of working-class movements to emphasise the distress among the old. The English system was, and is, peculiarly unresponsive to reform. Thus we have, on the eve of the Boer war, the prime minister, Lord Salisbury, in favour of relaxing the "rigour of the poor law in favour of old people", with a weekly payment to the over 70s. But under pressure from the chancellor of the exchequer, who complained of "the unquantifiable and potentially vast expense involved in the scheme", Salisbury backed down:

"Any measure in favour of those who are not in real poverty would be very unjust." When the Liberal bill of 1908 went before the Lords, some clauses were rejected. This was a mild bill. No one under 70 would receive anything. Only 5/- a week was to be paid to a single person, 7/6 for a couple, and strict means-tested cut-off payments for those whose incomes exceeded 10/- a week. Nonetheless Lord Rosebery, an old-style Liberal, denounced the measure as it "symbolised the passing of family pride, it is socialism pure and simple... (the) beginning of a long process which will culminate in the handing over of hospitals to the state".

After the first world war, the 1920 Unemployment Insurance Act brought most workers earning under £250 a year into the insurance scheme, and the 1925 Widows, Orphans and Old Age Contributory Pensions Act made the payment of national insurance the basis for the state pension we have today. Then came Clement Attlee and the extension of social-security benefits, including family allowances, to all. With "no ifs or buts", the legions of divorced, infirm, the abandoned, the victims of fraud and all who lacked enough income for outgoings, would obtain a basic pension and retain this regardless of whether they received a municipal or occupational pension. Legislation thus gave the British the absolute right to defined universal pension benefits; no means test, no cap-in-hand before a poor-law committee, no chance of a pension fund whittling away your entitlement. When you die, your spouse inherits the right to part of the pension.

But the scheme has flaws. The pension was set at only 19.1 per cent of average male earnings. While the country would probably not stand for a cut in the absolute benefit, a message the current government appreciated when the pension was uprated by only 75p, it is open to subtle erosion. It has usually been linked to price inflation, and not earnings, which rise faster than prices. A short-lived connection to earnings in 1975-80 pushed the pension to 19.8 per cent. But this link to earnings was then scrapped, and by 1997 the state pension was worth 15 per cent of average earnings. When we note that for half of British pensioners the state pension is the only one they have, we can give some meaning to the terms scrimping and patching.

By contrast, the message from western Europe is clear; they have been more successful than the Anglo-Saxons over the level of pension benefits and in planning for an ageing and healthier population. The models offered by France, Germany and Sweden are discussed at length. Everyone contributes to the insurance scheme, and though the charges are higher than in the UK, so are the guaranteed benefits. As early as 1973, a male pensioner on average pay in the Federal Republic would retire on 47 per cent of that final pay, with occupational pensions on top of this. France went even better. With all political parties subscribing, the administrative system is largely independent of government, and whether you are a retired civil servant or mineworker, the republic looks after you. Sweden was best of all. From 1959, state pensions were linked to earnings and by the early 1970s a male retiree on average earnings received two-thirds of his former income. So, while more is paid in by the worker compared with the UK, far better benefits, and not just for pensions, are available.

Why has the UK not taken up a west European model? The root problem is the lack of an informed consensus and debate within mainstream political life. Only briefly, under Barbara Castle, was a second contributory state pension designed to supplement the original pension scheme. But in 1987 legislation altered this State Earnings Related Pension Scheme (Serps) so that contributors could convert their contributions (and other contributory schemes) to a private scheme. Legal action has identified 1.5 million people who were missold private pensions, and who would have been better off staying with Serps. After legal action from the GMB union, and intervention from regulators, pensions companies agreed to compensation for policy holders. In December 2000 the Financial Times reported that the overall compensation, should claimants survive, could reach £13.5 billion.

Instead of a debate about underfunding of old age in the UK, we have panic about how longevity, pensioners' lack of work and dependent spouses who spend years as widows are eating up monies that could be put to more useful purposes. Blackburn explains our mixture of neo-liberal ethics and economics: a dependency culture, the nanny state, choice and privacy. Most of which were familiar to Lord Salisbury. The 1980s added the idea that there was no such thing as community, which even Salisbury would have found bizarre. The recent offerings floating around the City for the new Labour poor people's stakeholder private pension include restricting payments to named pensioners, nothing for widows and orphans and a retirement age of 70. Why not go the whole hog and bring back the workhouse?

Pension funds are arbiters as to where to place billions of pounds, and Blackburn points to the proven advantages of taking long-term equity and bond stakes. While, all too often, Anglo-Saxon fund managers insist they should be free to move pension monies from one market to another, to meet short-run targets, there is a major question here about support for companies and regions. The dominant European attitude is that pension funds have obligations to the country wherein money is raised, and long-term investment from these funds has benefitted the economies concerned and steadily improved incomes.

Given the defensive attitudes of the UK government towards the extension of state pensions, it is absolutely essential to initiate a debate on basic principles. As MPs vote themselves improved pensions and company executives continue to attract outrage on their packages, we should be arguing about the axioms that determine the pensions of the vast majority, and where the contributions go. This is why Blackburn's book is important. What is required is discussion of the economic problems of the retired of a kind, and on a level, that has not so far existed in the UK.

Richard Saville is historian of Coutts and Co.

Banking on Death Or, Investing in Life: The History and Future of Pensions